Recovery proving uneven among states: report

The economic recession that began in 2007 was uniformly damaging to U.S. states, sparing just one or two from its effects, but the recovery is promising to be uneven across the country.

According to a special report released on Tuesday by Wells Fargo Securities LLC Economics Group, Nevada and Florida will take the longest to recover while two of the worst hit by the recession -- California and New York -- will recover fastest.

California seems to be known for its large and reoccurring budget gaps, but the state's economy may not be as troubled as headlines suggest, it wrote about the world's eighth-largest economy. While still significant, economic activity actually declined less in California than it did nationwide.

The state's employment conditions are on the mend, it said.

Last week, California registered the largest employment increase of any state in February, 96,000 jobs.

Wells Fargo added that New York has managed to turn itself into one of the brightest spots in the country.

Since its labor market bottomed in December 2009, New York has recovered 71,000 of the 336,700 jobs lost, Wells Fargo said. Wages and salaries have grown for three months, as well.

The housing bust, financial crisis and recession caused an unprecedented collapse in states' revenues, forcing them to cut spending, hike taxes and turn to the federal government for help. Individual investors in the $2.9 trillion municipal bond market have been spooked by the persistent budget problems.

That's what has been interesting about this particular downturn for states -- almost every state was hit, said Scott Pattison, executive director of the National Association of State Budget Officers.

During the recession, which officially ended in 2009, the states moved in the same direction, Pattison said.

Now they're pulling apart from each other, he said. I think you are going to have smaller and commodity, energy-based states be in good shape.

California's economy may be returning to health, but its budget could remain constrained, he added. He expects budget woes to persist in states hurt by housing, such as Nevada.

Nowhere in the country does the economic picture look bleaker than in Nevada, according to the Wells Fargo report. The state has the highest unemployment rate in the nation, standing at 13.6 percent in February.

At the same time, Florida must deal with a surge in negative equity for many homeowners and a nearly idled construction industry.

The recession's effects were widespread, but the depth of its impact varied across states, said Nick Johnson, vice president for state fiscal policy at the Center on Budget and Policy Priorities, a think tank tracking state budgets.

We are still seeing virtually every state facing a projected budget shortfall for next year, he said. It means that every state is going to have to do some combination of tax increases and spending cuts.

For the next budget year, which begins for most states in July, states are projecting budget gaps totaling $112 billion, his group has found.

The spending cuts and tax hikes will produce a drag of about 0.5 percentage points on real GDP growth nationally, according to Goldman Sachs. But the investment bank's research group said the gaps could be improved if states temporary measures they put in place during the recession.

While states continue to face structural challenges and some of the cuts they must make will be painful, the macroeconomic effects of state government tightening should soon begin to diminish, the group wrote. (Editing by Diane Craft)